The dollar will surprise by getting stronger next year as the U.S. economy outperforms, according to some of the world’s biggest money managers.
Fidelity International, JPMorgan Chase & Co., and HSBC Holdings Plc are going against the consensus by warning of dollar strength, while Loomis Sayles & Co. says a global economic slowdown will see traders flock to the world’s reserve currency.
The handful of contrarian views are based on expectations that the rest of the world will struggle more with higher interest rates than the U.S. and lurch closer to a recession. While the Federal Reserve has indicated it plans to cut interest rates by 75 basis points in 2024, dollar bulls expect similar or even quicker reductions in other major economies from Europe to emerging markets, leading to wider rate differentials.
“It is peculiar that the consensus thinks the U.S. dollar will be the loser in 2024,” said Paul Mackel, global head of FX research at HSBC. “A number of scenarios point to dollar resilience but only a global soft landing delivers a clear dollar bear case.”
A weaker dollar in 2024 is the majority view among analysts surveyed by Bloomberg across the Group-of-10 nations and emerging markets. All but one currency in the Dollar Index and the broader Bloomberg Dollar Spot Index, which includes EM, is expected to gain.
Those expectations may be missing how the dollar typically benefits from flight-to-safety flows, and the relative weaker growth dynamics outside of the U.S.
“We do think that Europe and the U.K. are closer to recession,” said George Efstathopoulos, a Fidelity money manager who is positioned for further greenback strength against the euro and sterling. “It’s clear that the dollar always get a bid when this happens” as it becomes a haven, he said.
Some Wall Street banks also agree, with Morgan Stanley predicting that the Dollar Index—which measures it against six Group-of-10 peers—will climb to 111 by spring from around 102 now. JPMorgan strategists including Meera Chandan see the gauge rising 3% in the first half.
“The ‘stronger for longer’ USD path incorporates U.S. outperformance across a variety of metrics,” strategists including David Adams, Morgan Stanley’s head of G-10 FX strategy, wrote in a report published Nov. 13. These include the prospect of earlier and faster European Central Bank easing, which would keep rate differentials in the dollar’s favor, he added.
Market expectations for U.S. rate cuts have surged this week following the Fed’s signaling of a pivot on Wednesday. Traders are pricing in 150 basis points of U.S. rate cuts over the next year, up from under 100 basis points before the policy meeting. That still lags the 155 basis points of cuts seen for the ECB and trails emerging-market central banks from Mexico to Brazil.
ECB and Bank of England officials indicated on Thursday they’re still concerned about inflation and aren’t thinking of easing.
Loomis’s Lynda Schweitzer favors the U.S. currency as a hedge. “It’s just on a relative basis and on our view that a global slowdown is coming, we feel better about being slightly long the dollar versus other currencies,” said the money manager, who is shorting the yuan, sterling and euro. Still, in the near term, the firm has reduced its long dollar positions, she said, citing the continued resilience of the U.S. economy.